New Jersey Estates/Weichert Realtors/ NJ Luxury Real Estate/ New Homes: April 2009

Congress got back to business last week after its holiday recess, and big changes to the U.S. home mortgage system were high on the agenda in the House.

Financial Services Committee chairman Barney Frank and two colleagues have introduced a mega-bill that would make top-to-bottom changes in the way mortgages get made and marketed to borrowers.

But if real estate and mortgage industry testimony at a hearing on the bill is any indication, not everybody's happy with some key provisions, especially those that could limit the types of mortgages that shoppers get to choose.

Frank's bill would require lenders to retain at least a five percent credit risk -- or "skin in the game" -- on every mortgage they write that is not a "qualified" 30-year fixed rate.

If the loan later went bad, they'd still be on the hook for at least five percent of the losses. During the subprime boom, by contrast, many brokers and lenders originated loans for sale to investors with little or no expectation they'd ever be blamed for later problems.

The core idea here, say supporters of the legislation, is to cut down on mortgages with high risk features -- negative amortization, interest-only, and short-term adjustables -- that are made with minimal documentation.

But McMillan and other industry leaders told Frank that too narrow a definition of "qualified" could restrict consumer options for financing real estate.

McMillan urged the House to broaden the definition to include 15-and 25-year fixed rate mortgages, plus "5-1" and "7-1" hybrid adjustables.

David Kittle, chairman of the Mortgage Bankers Association, warned that although the bill would not ban alternative loan products, the credit-risk retention rule would mean some commonplace mortgage types might only be offered "at substantially higher costs, if at all."

He urged Congress to expand the "qualified" list to all FHA-insured mortgages and those eligible for purchase by Fannie Mae or Freddie Mac .

Denise Leonard of the National Association of Mortgage Brokers said the bill in its current form not only would limit loan availability, but would also penalize loan officers who "steer" clients from "qualified" plain-vanilla mortgages into virtually anything else.

The legislation, most likely with some broadening of the definition of what's a qualified mortgage, is expected to pass the House soon, and head to the Senate for final action.


Written by Kenneth R. Harney
April 27, 2009 

Thank Them For Their Service

The news these days is all about the economy. All day every day. It overwhelms us. One unfortunate side effect of this is that lots of other items that would normally receive our attention are pushed to the back pages, if they are covered at all.

One of those back page items is coverage of our troops in Iraq and Afghanistan. That's too bad.

During the past few years, regardless of where one stood on our military involvements, there has been a near unanimous outpouring of support and appreciation for our military. Those expressions of support, I fear, are occurring less frequently as so many are focused on worries about their job, their homes, and vanishing retirement funds.

But we owe those servicemen and women no less now than we did when homes were appreciating and loans were plentiful.

A few years ago my wife and I were riding on a bus with a group of people who were the beneficiaries of what we called a "political event." It was sponsored by a state legislator. We were going to a ball game. On the bus was a person who was employed by a large, well known, California company. He was, essentially, a lobbyist.

We heard him chatting with people around him about some of his experiences as a pilot stationed on an aircraft carrier. Later, after the talk had died down, we asked him about his experiences. He was a naval aviator during the Vietnam War. We thanked him for his service.

He told us that we were only the second persons who had ever said that to him. The first was a South Vietnamese woman whose parents had immigrated to the United States. She was now working in a government-related job in Sacramento. Her family had lost everything in the war. She thanked him for what he had done and what he had made possible for her.

So what does all this have to do with real estate? Everything. In up markets and down, we still enjoy the right to own private property. There is still an American dream. There is a dream of home ownership, of getting ahead, and of making a future for the next generation. We're in a rough patch right now; but the dream is still there, and still being realized in millions of lives. That dream is secure, because, all around the world, young men and women are standing on a wall. They are putting their lives on the line to defend our country and our dreams. They are there because of the dream; and it endures because they are there.

Does what these people do actually mean anything to any of us? Ask Richard Phillips, Captain of the Mersk Alabama.

I hope the young men and women who wear the uniform won't have to wait as long as our friend did before they hear a word of thanks. Please - walking down the sidewalk, waiting at an airport, shopping at the grocery store - if you have the opportunity, thank them for their service.


Written by Bob Hunt
April 23, 2009 

That's advice that many experts are giving to those who are planning to stay in the same house for a few years. The cost of buying and relocating in a short period (a couple years) can make the concept of buying not appealing or cost effective. But if it's for the long term, owning can make perfect sense. But what if you're a first-time buyer or you haven't owned a home in a while, how do you prepare for what is often the largest purchase you'll ever make? Buying a home isn't that difficult but it does require you to make sure that you're in the right financial (and emotional) position to do it. How do you get there when so many other expenses often take precedence? Simple but not necessarily easy steps can help you position to transition from renter to home owner. It starts with getting familiar with your financial picture. If you are aware of what lenders are looking for before you apply for a loan, you'll have a greater chance of getting it and it'll be helpful when you meet with your real estate agent. No time will be wasted looking at homes that aren't in your price range. You will have a clear-cut idea of what you can afford and then you can confidently look for the most suitable home.

Take a keen look at your budget. This presumes that you have a budget. If not, develop one. You can use numerous software programs to create a budget; many are free, or you can even use a basic spreadsheet. If you're self-employed, take a look at free online bookkeeping software offered by Outright.com. It can help you track your income and expenses for your business allowing you to create a better recording system to help you save time and money. Review credit history. If you have no idea how your credit looks, then it's time to give it a review. When you take a look at your credit report, you will be able to see if there are errors or dings from late payments that are negatively affecting your credit score. This gives you a chance to dispute errors or work to clean up your credit before you apply for a home loan. When I reviewed my credit cards, I found a few hundred dollars that had been automatically billed to my credit card in erroneous subscription fees. Your credit card can file a dispute with the companies and credit the funds back to your account. It pays to double check; you just never know what you'll find.

Redistribute your money. Don't think of it as cutting back, but rather as moving your money from one place to another. For example, if you're spending $3 on a specialty coffee five days a week, think about making your java at home and putting that $15 a week into an account that is going to be used to purchase your home. It all adds up and most of the time, we don't realize how much money a dollar spent here or there can accumulate.

Another way to redistribute money is to examine your insurance policies and consider raising the deductibles. A lot of people want low deductibles in case of a loss or an accident, but you can actually save money and redistribute that money into an account that is set aside for purchasing your home. But some statistics show that the average person files a claim only once every 13 years, according to insurance broker, Michael Rice of Thomas Ward Insurance Group. So raising your deductible from, say, $500 to $1,000 can give you an annual premium savings of 10 to 15 percent. Rice also recommends paying your premium in full if the insurance company offers you a discount to do so; some offer a five percent or more deduction and you won't be charged administrative fees for periodic billing.

Keep your eye on the goal. Staying focused on the goal of buying a home will help you to remember that cutting costs now will allow you to have what you want in the long run. Our society is accustomed to instantaneous gratification so delaying the reward can be very challenging but well worth it. Owning your own home and, being able to purchase it while in a down market, is an exciting win-win.


Written by Phoebe Chongchua
April 17, 2009 

Investor Report: Rental Market Hurting

Competition in some rental markets is pushing landlords to offer increasingly creative concessions to tenants, such as free rent for a month or two, and even job-loss protection that guarantees the rent will be paid if tenants lose their jobs.

New York-based REIS, Inc. reports that half of all apartment buildings in the U.S. reduced rents in the fourth quarter of 2008 and the first quarter of this year, according to Business Week.

Rents quoted by landlords dropped by six tenths of a percent in the first three months of 2009, and effective rents -- netting out all the concessions offered by landlords -- fell by 1.1 percent.

Effective rents were down in four out of five of the 79 metropolitan markets surveyed by REIS. So if you are a landlord who lowered your rents in the past couple of months, you've got lots of company.

In San Francisco, average effective rents were down by nearly 3 percent in the first quarter. In New York City, they were down by 2. 6 percent, 2.5 percent in San Jose, by 1.3 percent in Charlotte, and by 1.2 percent in Chicago.

Only the big Texas markets -- Dallas and Houston -- saw average effective rents move up.

Landlords are cutting rents primarily because of rising job layoffs, cutbacks in working hours, and higher unemployment filings.

According to James Lewis, president of Maitland, Florida-based Charles Wayne Consulting, "more and more tenants (are) doubling up or moving back with family to better deal with the bad economy."

Cole Whitaker, a partner in Hendricks & Partners, an apartment consulting firm in Orlando, says building owners' expenses - like property taxes and insurance - continue to rise, but landlords can't pass those increases onto tenants and keep their buildings full.

"Our boys are eating (the differences)" for the time being, Whitaker told the Orlando Sentinel.

In some tough markets, landlords are adopting sales techniques used by car manufacturers. They are guaranteeing prospective tenants up to two months of free rent, even if they lose their jobs.

Cleveland-based Goldberg Co., an apartment investment firm with projects in Florida, Texas, North Carolina and Ohio, is advertising "layoff-proof" leases. After two months of unemployment and free rent, the company allows tenants who can't find a job the right to break the lease -- without paying a penalty.


Written by Kenneth R. Harney
April 17, 2009 

This lack of liquidity is not the result of loan losses associated with the subprime meltdown. Few small banks were involved in the deal-flow of subprime loans. When the music suddenly stopped, the small banks were not left holding a huge volume of unsold subprime residential loans. It is easy, therefore, to assume that the small banks should have plenty of money to lend.

In fact, the opposite is true. Banks have always preferred to make short term loans, like construction loans and bridge loans. This way they constantly have a few outstanding loans paying off every month, giving them the liquidity to make new short term loans. Unfortunately, ever since the financial crisis began, their outstanding loans have not been paying off. Borrowers with construction loans and bridge loans have been unable to refinance their loans with long-term lenders. The banks have been forced to extend these short term loans into longer term mini-perms.

To make matters worse, most small banks had a great many lines of credit extended to businesses that they served. Most of these businesses are now losing money, so the businesses are drawing down on their credit lines. This has further drained liquidity from the banks.

Lastly, this is a very difficult time for banks to attract new deposits. The prime rate is a rock-bottom 3.25% right now. The 11th District Cost of Funds Index, a fair proxy for the typical bank's cost of funds, is a whopping 2.75%. Twenty years ago a small bank could not survive on a gross interest margin of less than 6%. With sophisticated new software and ATM's, a small bank can modernly make a profit on a gross interest margin of 4%. Hello? Small banks are being forced to survive right now on a gross interest margin of just 50 basis points. They certainly cannot raise interest rates to compete for more deposits.

I feel like an early pioneer, whose wagon train is surrounded by angry Indians, and who learns that the cavalry detachment sent to relieve him is itself under siege by Indians. The small banks were one of the last sources of lending that might save this faltering economy, and it now appears they too are under siege. Yikes.

George Blackburne, III is an attorney and the owner of Blackburne & Brown, a large commercial hard money lender, and C-Loans, Inc., the sponsor of C-Loans.com. He is also the author of the recent financial thriller, The Reverse Multiplier Effect.


Written by George Blackburne
April 15, 2009 

Be Respected as an Advisor: Stop Being Paid Like a Salesperson

There has been a lot of discussion of late on real estate blogs regarding buyer agency and the plusses and minuses of working in a buyer agency-only firm (Exclusive Buyer Agency) versus practicing buyer agency in a brokerage that also includes seller agency.

The main theme around these threads is how to get the consumer to trust, and thus demand, their own representation. The proponents of Exclusive Buyer Agency argue that the problem of trust would be eliminated if the public could understand the advantages of having an entire office that just practices buyer agency. Practitioners of buyer agency in traditional brokerages (those that have both buyer and seller agents in the same firm) argue that with the advent of designated agency, practicing buyer agency in a traditional firm no longer presents a conflict of interest.

The problem with this discussion is that both sides miss the larger issue. The true disconnect for the buyer in understanding, and thus demanding representation, dates back to the mid 90's when our boards and associations started asking us to shift from a sales role (move the product) to a fiduciary role (represent the client). While they asked us to shift our role with the client, they failed to change our compensation model which set up an inherent conflict of interest: how can you act as a fiduciary and give truly objective counsel when you are being paid contingent on the client's actions?

Commissions make total sense for a salesperson, whose only responsibility is to sell the product. But, if we are expected (and in fact according to NAR's code of ethics, required) to put the client's needs above all others, including and most especially our own, then WHY haven't we shifted our compensation to mirror how other fiduciaries are paid?

Think about it: auto salespeople are paid by commission which makes sense given their role: while we hope that they will deal with us honestly and not misrepresent their products, we don't ask them to represent us. We understand that their loyalty is to their dealership and themselves, not to us. A car salesman should be knowledgeable and helpful but he or she is not expected to be our advocate.

Can you imagine entering a showroom and having a salesman come up to you but instead of showing you cars, whips out a contract and says:

Before I start showing you around, I'd like you to consider signing this contract. By doing so, I can represent your interest rather than that of the dealership. And even though I'm paid by commission, signing this contract will allow me to negotiate the best deal on whatever car you decide to buy.

This guy wants to represent my needs and negotiate the best deal for me on a car, yet the amount of his compensation-or whether he gets paid at all-is wholly dependent on my decision. And how is it that he will use his skills and experience to negotiate the lowest price when he is paid as a percentage of what I end up paying?.

But suppose that during the consultation, the attorney started discussing some financial products that she sold on the side.

Instead of paying me by fee, you can buy one of these products. I'll get a commission on whatever I sell you and you'll end up paying less.

If this happened, not only would you be confused, you would probably be out of there! Your expectation was that you were hiring a professional to consult with you, not to sell to you. Most of us would be very skeptical about an attorney giving truly objective advice if her pay was contingent on selling you something and on how much you spend overall.

How much trust would you give a doctor's prescription if he/she was paid as a percentage of how many drugs they sold? What about a CPA's advice if they were paid contingent on Uncle Sam being nice to you? Would you feel comfortable about your dentist telling you that you had two cavities that needed to be filled when he was paid by the number of fillings he performed?

So WHY do we continue to ask the public to trust our profession to give objective counsel regarding their real estate decisions when our compensation is contingent on their actions? Anyone who has worked as a buyer agent for any period of time has inevitably heard the following question: "Why would you negotiate the best deal for me when you get more money from a higher sale price?" My answer has always been:

"My business is built on referral. A few extra dollars in my pocket isn't going to mean beans when you find out that paid too much."

But while my answer is sound and reflects how I work, it still begs the questions of the inherent conflict of interest when you're compensated for moving product while charged with giving objective counsel.

As long as the amount of our compensation (or whether we get paid at all) is dependent on the actions of the client that we're advising, don't expect the client to truly trust our advice.

Now, this doesn't mean that we can't continue to offer commissions as an option, especially for clients that already know us. But commissions should be one choice in our toolbox, not the only one. Most consultants in other fields such as CPA's and attorneys offer options in the services they provide and they are often paid by a non-contingent fee. Whether we are representing sellers or buyers, if we are going to be regarded and respected as fiduciaries, we need to stop being limited to a salesperson's compensation.


Written by Mollie W. Wasserman
April 14, 2009 

In an interview I had with Shaun Donovan, the new HUD secretary, he said downpayment assistance is acceptable if the money comes from sources not connected with the transaction -- local government grant programs, nonprofits gifts from family members for example.

But seller-financed deals, where the cash for the buyer's downpayment flows from the home seller through a tax-exempt charity to the purchaser, has produced disproportionately high rates of defaults, foreclosures and losses to FHA insurance funds, said Donovan.

Brian Montgomery, who served as the Bush administration's FHA commissioner, adamantly opposed seller-funded down payments, and resisted efforts by congressional Democrats to restore the program last year. Montgomery has remained in his post during the early months of the Obama administration, pending confirmation of Obama's FHA commissioner, David Stevens.

Both the National Association of Realtors and the National Association of Home Builders have called for resumption of down payment assistance, citing the hundreds of thousands of home purchases by lower and moderate income buyers that used the program from 2001 to 2008.

Texas Democratic congressman Al Green introduced legislation in January to bring back down payment assistance, but with a number of changes including minimum credit scores, counseling for buyers and tougher standards for the organizations offering the programs.

In the interview, Donovan, who ran New York City's housing development and preservation department for four years prior to joining the Obama team, said he is "absolutely concerned" about the rapid growth of the FHA program ... and the potential for fraud and poorly-underwritten loans slipping through the cracks.

FHA volume has zoomed from less than a three percent market share during the housing boom years to more than 30 percent at present. Down payments go as low as three and a half percent on loans that can approach $730,000 in high cost areas.

Donovan said he is pressing Congress for more money for FHA to upgrade computer systems, hire more staff, and expand fraud-detection and loan-monitoring capabilities significantly.

FHA's "historical role, which is really being demonstrated (today)," he said, "is to ensure there's adequate capital available for housing," especially for first-time buyers and people with moderate incomes who may not be able to afford the higher down payments required by Fannie Mae and Freddie Mac.

"We're serving that role," Donovan said.


Written by Kenneth R. Harney
April 13, 2009